Annual consumer inflation was unchanged at 3.2% in February at 3.2%, with increases registered in housing and utilities, food and alcoholic beverages and restaurants and accommodation offset by decreases in the services sector, Statistics South Africa said on Wednesday.
(Guillem Sartorio/Bloomberg via Getty Images)
With record-high inflation and fears of a recession weighing down on consumers the world over, some governments have stepped in to ensure their constituents aren’t totally crushed, but South Africa likely does not have the resources to similarly step up.
In some countries, like Saudi Arabia, France and parts of the United States, governments are planning to reach into their public coffers to offer residents so-called “inflation relief” in the form of grant increases and new, once-off, direct cash transfers.
But in other parts of the world, like South Africa, similar relief may prove more evasive — especially as their governments continue to tighten their purse strings in an effort to restore public funds after Covid-19’s economic onslaught.
‘Money in pockets’
This week, Saudi Arabia became the latest country to earmark relief for households struggling against the crush of inflation. The Middle Eastern country will reportedly provide $5.3-billion to support citizens, about half of which will be distributed as direct cash transfers to support social security beneficiaries.
Also this week, the French government under newly re-elected Emmanuel Macron is set to present a much-awaited package of inflation relief measures. The measures, which reportedly include raising the tax-free transport cost cover offered to workers and basic pensions and various welfare payments by 4%, come as France battles inflation that has accelerated at the fastest pace since the euro was introduced.
Details about France’s inflation package come a week after California governor Gavin Newsom announced that residents of the Golden State would receive financial relief from the burden surging inflation has had on their paychecks.
As part of an inflation relief package worth $17-billion, an estimated 23-million eligible California taxpayers will receive payments, totaling up to $1 050 by early next year. “That’s more money in your pocket to help you fill your gas tank and put food on the table,” Newsom said.
Other US states, including Maine and Delaware, are also paying direct stimulus, while many more have given residents tax rebates. Inflation in the US hit 8.6% year-on-year in May, the highest level since 1981.
Stubbornly high inflation stateside has been the result of supply-chain chokeholds, as well as labour shortages, and has caused consumer confidence to trend downwards. Data released by New York-based researcher the Conference Board last week showed that its US consumer confidence index fell 4.5 points in June and now stands at its lowest level since February 2021.
A grimmer outlook
Moreover, the organisation’s expectations index, which is based on consumers’ short-term outlook for income, business, and labour market conditions, fell to its lowest point in nearly a decade. “Consumers’ grimmer outlook was driven by increasing concerns about inflation, in particular rising gas and food prices,” Lynn Franco, the Conference Board’s senior director of economic indicators, said in a statement.
South Africa’s inflation has remained relatively low compared to the United States, which, on top of supply constraints, has also grappled with far too buoyant demand. But there are now signs that domestic inflation is catching up — and that consumers are feeling the pinch.
After inflation surged above consensus expectations in May, an index compiled by FNB and the Bureau for Economic Research showed that South African consumer confidence fell to its lowest level in three decades, bar the second quarter of 2020. Low consumer confidence will weigh on economic growth as demand wanes.
Another major increase in the petrol price in July means that inflation will likely remain above the South African Reserve Bank’s 6% ceiling, causing food prices to continue climbing higher.
Sanisha Packirisamy, an economist at Momentum Investments, noted that there are mixed views on how the government might deal with higher fuel costs: “In some cases, people believe that relief should come through in the form of higher social grants or a cash amount, rather than just reducing the fuel levy — because that will only benefit certain consumers and not the broad spectrum,” she explained.
In order to soften the blow of higher petrol prices, the treasury cut the fuel levy by R1.50 a litre in April, May and June. Despite calls to sustain the R1.50 cut, the general fuel levy was reduced by 75 cents per litre in July.
In July, 95-octane petrol will cost a record R27.74 a litre. Some economists expect that continued petrol price increases will push consumer inflation north of 7%.
Spending pressures
The government shouldn’t be looking for other avenues that bump up fiscal spending, “given that we have a lot of pressures that are going to come through on the expenditure front and we don’t have any permanent additional revenue streams to match that”, Packirisamy said.
“In some economies, where there is a little bit more fiscal space, it is more possible to do. Many emerging markets saw quite a lot of their fiscal buffers were eroded during the Covid-19 pandemic,” she said.
“At that stage, they already increased the equivalents of social grants, increased government spending on things like infrastructure programmes and cut taxes. Over that period, we saw debt-to-GDP ratios picking up quite substantially. So that means that there’s quite a lot of pressure on governments around the world to start reining in their fiscal deficits.”
The South African government is already facing pressure to increase spending by finding a permanent replacement to the R350 social relief of distress grant, which was introduced during the pandemic and reinstated in response to last July’s unrest. An expert panel report on the unrest concluded that the upheaval was aggravated by high levels of unemployment and poverty in the country.
Lullu Krugel, chief economist at the PwC South Africa, said that — affordability aside — the government should at least consider expanding relief beyond the fuel levy cut.
“There are two sides to the coin. On the one side, for government, affordability is a challenge. But on the flip side, given the extremely high levels of unemployment … and all households, no matter whether they are the lowest income or highest income, are spending about 50% of their income on either fuel or food,” she said.
“So I would hope that they would think about potential solutions and see how they can manage some of the impact of that.”
Very special circumstances
On whether the government might consider topping up existing grants, even temporarily, Krugel noted that, if this happens, it may be very difficult to later take away any additions to an augmented social welfare package.
“It is an option and the processes are already there for the distribution. If you could use existing processes, that could help. That R350 grant is not a lot. It is a drop in the ocean. But the challenge is, if you do top it up temporarily, then it really must be temporarily. And I am not so sure at this time if it is easy to do that,” she added.
Krugel said, however, “given the situation that we are in it would be really insensitive to say we shouldn’t at least consider that”.
“These are very special circumstances. We have just been through an extremely tough period. We have very high levels of unemployment. So we should explore that option at least.”
Dick Forslund, a senior economist at the Alternative Information & Development Centre, agreed that the current conditions are extraordinary and therefore warrant significant government intervention. “I mean the situation is extremely dire. Everybody can see that. It is almost like we are under siege,” he said.
He added, however, that the government and treasury are “on a different trajectory”: Reducing the role of the public sector in the economy. Austerity, Forslund argues, serves this end, by diminishing the state’s capacity to address various social crises.
“This situation is one in which the state and the government should intervene. It is as if the country is under attack. But that is not the policy or the treasury, their ideology or their thinking.”
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